3 Common Business Accounting Errors
and How to Avoid Them
More than 50 percent of all businesses started today won’t survive long enough to celebrate the tenth anniversary. As an entrepreneur, you probably know this. What you might not know is that of these failed businesses, 82 percent will attribute their failure to a cash flow problem or some other financial challenge.
Making accounting errors in your business is one sure way to ensure your business runs into financial challenges. If you’re still in charge of your business’s finances, it’s super important to have a grasp of common accounting errors and how to avoid them.
Read this helpful guide before you go on with your day!
Every day, there’s money coming into your business (revenues) and money going out (expenses).
As a prudent business owner, it’s your duty to record these inflows and outflows. Most business owners do this, but if you aren’t careful, you could make costly entry errors. For example, you could record a certain expense as revenue and vise versa.
You might spot this mistake if you balance your finances at the end of every day, but if you balance your books at the end of the week or month, you might not be able to spot it. You could know that something isn’t adding up, but you would have to dig through a month’s worth of data to find the specific errors. You probably don’t have enough time (or patience) to do this.
To prevent these errors, you really need to be hawk-eyed.
Error of Omission
This is one of the most common accounting errors. You simply forget to record a certain item. Perhaps you’ll tell yourself that you’ll do it later and forget about it entirely, or you brush it aside, saying it’s not an important accounting item.
Errors of omission can lead to big problems down the road. For instance, if you don’t record a sale, you risk underreporting your income come tax time. Guess what happens when you don’t report your income accurately? You get a visit from Uncle Sam.
Or, if a client settles an invoice and fails to record the payment, you could forget that the client ever paid you and go after them. This could ruin your relationship with the client.
Again, avoid errors of omission is all about diligence. If you don’t have the time to keep up with accounting, hire an in-house bookkeeper or outsource the function.
You can also use software to generate and store important accounting data. If you’ve got workers, for instance, you can create pay stubs and issue them while keeping copies to yourself.
A compensating error occurs when you understate an income item while overstating an expense item – by the same amount.
In terms of balancing the books, the net effect is zero, so you might not readily notice the error. In the long-run, though, you’ll end up with inaccurate books of account.
Avoid These Accounting Errors in Your Business
Accounting errors can distort your business's financial information, which can cause you to make bad decisions. The most effective way to avoid these errors is to let a professional take care of your business’ finances; otherwise, you run a big risk.
Keep reading this blo for more business advice and tips.